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The optimal benchmark for a currency overlay mandate

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  • J Binny

    (Gartmore Investment Management plc)

Abstract

Having decided to implement a currency overlay programme, a pension fund must decide on the benchmark for that mandate. The answer is not always clear cut and can have a significant impact on the results of the strategy. There are a series of competing factors, which have differing influences on different pension funds' selection of benchmark. As a result, there is no one ‘correct’ answer that applies to all. A careful assessment of an individual client's needs and risk preferences, both investment and behavioural, is essential. This paper summarises the alternatives, together with the research already performed on the subject, then presents a methodology for assessing a pension fund's optimum benchmark, which can be adapted to any base currency. I would emphasise that it is not possible to design a ‘black box’ that will inform precisely what the benchmark should be — it is necessarily an oversimplification. It can be a useful form of decision support, however, to be used in discussion with an experienced currency overlay manager or investment consultant and can provide a degree of structure to that discussion.

Suggested Citation

  • J Binny, 2001. "The optimal benchmark for a currency overlay mandate," Journal of Asset Management, Palgrave Macmillan, vol. 2(1), pages 22-34, June.
    • Handle: RePEc:pal:assmgt:v:2:y:2001:i:1:d:10.1057_palgrave.jam.2240032
    DOI: 10.1057/palgrave.jam.2240032
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